New legal form – Small Partnership

EcovisLaw on Small Partnership of the Republic of Lithuania (hereinafter – the Law) has entered in force on 1st September, 2012 creating new legal form of company – Small Partnership.

Till now there were two types of forms of active legal entities dominating in Lithuania: Private Limited Liability Company (PLLC, 56%) and Individual Enterprise (IE, 19%). Together these two legal forms constitute around 75% of all active Lithuanian legal entities. It is estimated that 99.4 % Lithuanian companies are small and around 74 % of them have less that 9 employees. Therefore it is hoped that the new legal entity – Small Partnership – will accelerate the startup of small and medium business. The new legal form should fill the niche between PLLC and IE, and it should be used for small or family business. The procedures of activity, management and accountancy for the Small Partnership are more simple than those for the PLLC. Small Partnership has simplified management, simplified accounting methods and the members of Small Partnership can administer the accounting.

Small Partnership is a legal entity, whose founders can only be natural persons. There can be maximum 10 members in Small Partnership and for establishing such company there must be at least one person. The Law does not provide other restrictions concerning who may establish Small Partnership therefore also foreign people can establish Small Partnership. The residence of Small Partnership has to be in the territory of the Republic of Lithuania. In order to establish Small Partnership there is no requirement to form the minimal share capital. It is planned to create a possibility to establish Small Partnership by filling the correct forms in internet without going to the notary. In order to establish Small Partnership an incorporation contract (in case of few founders) or an incorporation act (in case of a single founder) shall be signed. It shall contain the following information: founders, the name of the company, residence of the company, legal form - Small Partnership, manager (if any), members’ contributions, their amount or value, the representative of Small Partnership, date and other information.

The basic difference from PLLC will be the absence of minimal share capital. Small Partnership will have limited liability and this will differ it from the IE so members of Small Partnership will only risk their original contribution and in case of bankruptcy, Small Partnership members will not respond with their private property. Members of Small Partnership should be allowed to divide the profit in advance (not only once a year, like the shareholders of PLLC).

Despite the fact that there is no requirement to form the minimal share capital in Small Partnership, money are needed to start business and therefore a member of Small Partnership can only be a person who has transferred or has undertaken to transfer the contribution. The advantage is that the members are free to decide the amount of such contributions in accordance to their business needs. The contributions of members of Small Partnership can be monetary and non-monetary (movable and immovable property), property rights, but work or services could not be members’ contribution. Members’ contributions become the property of Small Partnership after they are transferred to the company.

Small Partnership has a lot of differences from IE. First of all, only one natural person can establish IE and he becomes the owner, Small Partnership can be established by more than one natural person, but not more than 10. Secondly, IE owner has unlimited liability, and responds with his personal property against the creditors of IE whereas the members of Small Partnership will only respond with their original contribution. Furthermore, IE owner makes the decision by himself and in Small Partnership the decisions are made by its members (in members meetings), where one member has one vote. Moreover, in IE the profit goes to the owner and the profit in Small Partnership is divided to the members proportionally to their original contributions.

Other persons can join Small Partnership under the decision of the members’ meeting and in accordance to the fact that Small Partnership may not have more than ten members. Any member can leave Small Partnership anytime by giving a written notice to the company and the company shall pay him back his contribution in accordance to the profit/loss of the company at the day of such notice. The members of Small Partnership can transfer their rights to third persons in case they have fully fulfilled their obligations to Small Partnership what concerns their contributions. The members shall give a written notice thereof to the company. The members are restricted in a way that they can only transfer their rights to natural persons. The members’ meeting shall take a decision on payoff to the member who intends to transfer his rights.

Small Partnership can be reorganized to the company of other legal forms, including PLLC or IE and others. Also PLLC and IE can be reorganized to Small Partnership in consideration to the fact that only natural persons may be members of Small Partnership and their number is limited to ten.

Small Partnership may have two managing bodies: meeting of members and a manager; or only one managing body – meeting of members. In case the company does not have a manager all the managing powers are hold by the meeting of members and the members shall elect one member as a representative of the company. Such representative is not treated an independent managing body but only represents the managing body – meeting of members. The activity of such representative may be paid or not.

The profit of Small Partnership will be taxable the same as the profit of companies of other legal forms – the usual rate of 15 %, and the rate of 5 % in case the company satisfies the requirements of the Law on Profit of the Republic of Lithuania. The payoff to the members may be taxable either as a wage or a distributed profit, depending on a situation.

The most appropriate legal form for doing business in Lithuania can be chosen after consulting with professionals the responsibility, taxation, management and other issues of planned business activity.

 

Dovile Aukstuolyte
Assistant to the Attorney at Law
ECOVIS Miškinis, Kvainauskas ir partneriai advokatų kontora

www.ecovis.lt